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US economy grew at strong 4 percent rate in spring

By MARTIN CRUTSINGER, AP Economics Writer
8:38 a.m. CDT July 30, 2014

In this July 29, 2014 photo, jeweler Murray Cadenhead works on repairing a piece of jewelry at Perry's Fine Jewelers on Independence Boulevard in Wilmington, N.C. The government issues its first of three estimates of how fast the U.S. economy grew in the April-June quarter on Wednesday, July 30, 2014.
(Photo:
AP Photo/The Star-News, Mike Spence
)

WASHINGTON (AP) — After a dismal winter, the U.S. economy sprang back to life in the April-June quarter, growing at a fast 4 percent annual rate on the strength of higher consumer and business spending.

The rebound reported Wednesday by the Commerce Department followed a sharp 2.1 percent annualized drop in economic activity in the January-March quarter. That figure was revised up from a previous estimate of a 2.9 percent drop. But it was still the biggest contraction since early 2009 in the depths of the Great Recession.

Last quarter’s bounce-back was broad-based, with consumers, businesses, the housing industry and state and local governments all combining to fuel growth. The robust expansion will reinforce analysts’ view that the economy’s momentum is extending into the second half of the year, when they forecast an annual growth rate of around 3 percent.

The second quarter’s 4 percent growth in the gross domestic product — the economy’s total output of goods and services — was the best showing since a 4.5 percent increase in July-September quarter of 2013.

A higher trade deficit was a small drag on growth, but even there analysts noted that exports posted a strong increase but this was offset by rising imports as a growing U.S. economy boosted demand for both U.S. and foreign goods.

Paul Ashworth, chief U.S. economist at Capital Economics, said that given the solid rebound, he’s boosting his estimate for growth this year to a 2 percent annual rate, up from a previous 1.7 percent forecast. Ashworth said the rebound also supported his view that the Federal Reserve, which is ending a two-day meeting Wednesday, will be inclined to start raising interest rates early next year.

Most economists have been predicting that the Fed would wait until mid-2015 to start raising rates.

“At the margin, this GDP report supports our view that an improving economy will persuade the Fed to begin raising rates in March next year,” Ashcroft wrote in a research note.

Ashcroft is among a group of economists who think growing strength in the job market and the overall economy will prod the Fed to move faster to raise interest rates to make sure inflation doesn’t get out of hand.

The GDP report showed that one measure of inflation rose 2 percent last quarter, up from a 1.3 percent rise in the first quarter. The Fed’s inflation target is 2 percent, and for two years the GDP measure of inflation has been running below that level. Low inflation has given the Fed leeway to focus on boosting growth to fight high unemployment.

The economy’s sudden contraction in the first quarter of this year had resulted from several factors. A severe winter disrupted activity across many industries and kept consumers away from shopping malls and auto dealerships. Consumer spending slowed to an annual growth rate of just 1.2 percent, the weakest showing in nearly three years.

Last quarter, consumer spending, powered by pent-up demand, accelerated to a growth rate of 2.5 percent. Spending on durable goods such as autos surged at a 14 percent rate, the biggest quarterly increase since 2009.

Consumer spending is closely watched because it accounts for more than two-thirds of economic activity.

In the April-June quarter, business investment in new equipment jumped at a 7 percent rate after having fallen 1 percent in the first quarter. That setback had reflected the expiration of business tax breaks at the end of 2013. Those tax breaks led companies to boost equipment spending at the end of last year.

Businesses, optimistic about future demand, increased their stockpiling last quarter. The increase in inventories contributed two-fifths of the growth in the quarter after having subtracted 1 percentage point from first-quarter activity.

Housing, which had been falling for two straight quarters, rebounded in the spring, growing at a 7.5 percent annual rate.

Government spending also recovered after two consecutive declines. The strength came from state and local governments, which offset the seventh quarterly decline in federal government spending.

With the new report, the government also released its annual revisions to GDP data for the previous three years. Those revisions showed that growth was slightly faster in 2013 than previously thought, mainly because the second half of the year was healthier.

But the government said growth in 2011 and 2012 was slightly lower than previously estimated. The new figures showed growth of 2.2 percent in 2013, 2.3 percent in 2012 and 1.6 percent in 2011.

Many analysts think the economy is on the verge of an acceleration after subpar annual growth rates of just above 2 percent through the first five years of recovery from the Great Recession, which officially ended in June 2009.

Mark Zandi, chief economist at Moody’s Analytics, said he thinks growth could accelerate to above 4 percent in 2015. He said he expects support from continued solid gains in hiring, which should translate into strength in consumer spending. Employers have added at least 200,000 jobs for five straight months — the best such stretch since the late 1990s tech boom.

“I think we are finally going to start seeing more wage growth and that should kick the economy into high gear by late 2015,” Zandi said.